Cost risks loom for APAC airlines despite strong demand, reports IBA

Analysis from IBA has found that Asia-Pacific (APAC) airlines entered 2026 with strong demand momentum and improving profitability, although rising exposure to fuel price volatility and geopolitical disruption could place increasing pressure on margins through the remainder of the year.

IBA forecasts that a three-month elevated fuel price scenario would reduce APAC airline EBIT margins by 3.6%, rising to 7.2% under a six-month scenario, with the region remaining particularly exposed due to generally lower fuel hedge coverage compared with many European carriers.

Despite these growing cost risks, data from the aviation intelligence platform IBA Insight showed that APAC airlines delivered a strong first quarter. Regional net profit margins improved by 1.2 percentage points year-on-year, supported by a 4.5% increase in yields, a 14.4% rise in total revenues and a 1.7 percentage-point improvement in load factors. Available capacity expanded by 6.2% during the quarter, demonstrating that underlying demand comfortably absorbed additional supply.

Domestic markets led regional growth, with capacity increasing by 7.1% compared with 5.4% internationally, although performance varied significantly across APAC markets.

China emerged as one of the region’s strongest performers, increasing market share by 1.0 percentage point to 39.7%. Chinese carriers benefited from continued access to Russian airspace, enabling expanded operations into Europe and North America, while international capacity recovered to 27.3% of total operations. This contributed to an 8.1% increase in yields and a 6.7-percentage-point improvement in net profit margins.

Although China's major airlines have returned to profitability, IBA notes that recovery remains uneven across the country's largest carriers. China Southern has seen the strongest recovery - EBIT margins reached 5.3% in Q1 2026, while China Eastern improved to 3.3%. Air China, however, remains only marginally profitable at 0.3%, highlighting the continued fragility of earnings recovery across the market.

Vietnam recorded the region’s fastest operational growth, with capacity increasing by 11.5% as strong demand continued supporting rapid fleet expansion. VietJet posted an 8.4% increase in yields, while Vietnam’s in-service fleet expanded by 9.5% and fleet activity rates increased to 88.7%.

India, however, experienced one of the weakest quarters among major APAC markets following significant disruption to Middle Eastern operations. Capacity declined by 2.6% year-on-year, while the country lost 0.8 percentage points of regional market share. Capacity to the Middle East dropped by 91% in March compared with February, reducing the region’s share of Indian carrier networks from 8.6% to just 2.4%.

The disruption contributed to IndiGo reporting a net loss of $277 million, with net margins falling 23.9 percentage points to -10.6%. IBA notes, however, that the result was driven primarily by foreign-exchange losses rather than by underlying operational weakness.

Xavier Baines, Senior Aviation Analyst at IBA, said: “Asia-Pacific airlines delivered one of their strongest starts to a year since the pandemic, supported by resilient demand, improving yields and healthy capacity absorption across most major markets.

“However, the region remains particularly exposed to prolonged fuel price volatility. Unlike many European carriers, fuel hedge coverage is generally lower, meaning sustained increases in fuel costs are more likely to feed directly into airline profitability. The carriers best positioned to navigate the remainder of 2026 will be those with the greatest network flexibility and ability to manage cost volatility."

While demand fundamentals remain healthy across much of Asia-Pacific, IBA anticipates that profitability performance through the remainder of 2026 will increasingly depend on fuel price stability, network flexibility and airlines' ability to sustain pricing power amid ongoing geopolitical uncertainty.